The acronym stands for “Portugal, Italy, Ireland, Greece and Spain.” Two to three years ago, stock indices and government bonds in those countries were tanking, and interest rates were soaring. The fear? The heavily indebted, economically challenged countries would default on their debts, unleashing the biggest sovereign debt crisis in world history.

But then, European Central Bank President Mario Draghi said enough is enough. He pledged to do “whatever it takes” to keep the euro-zone bond market from imploding and the European currency union from fracturing. That stopped the contagion, fueled a multi-quarter rally in European government bond prices, and sent the euro much higher.

The problem? None of the underlying, fundamental problems were really fixed! Politicians couldn’t come up with ways to boost European growth. Government debt loads never fell enough to put default off the table, despite the rally in bond prices.

ECB President Mario Draghi’s pledge to do whatever it takes to keep the euro-zone bond market afloat, isn’t working.

And one key cause of the crisis — European “too big to fail” banks loading up too heavily on the sovereign bonds issued by their own governments — wasn’t dealt with at all. Banks kept gorging on their own sovereigns’ bonds, rather than cut their exposure to a manageable level.

There’s a fairly large Portuguese financial firm called Espirito Santo Financial Group SA. It owns a quarter of the large Portuguese bank Banco Espirito Santo SA. There are also other affiliated companies in the overall group, with the overall structure so complex it’ll make your head spin.

But suffice it to say that investors have been dumping shares and bonds of virtually all of the bank-linked entities because they’re worried about default risk, accounting shenanigans and more! Things got so bad earlier today that trading was suspended in both companies.

That didn’t stop investors from dumping Portuguese shares overall, though. The main PSI 20 Index there plunged more than 4 percent on the day, and 12 percent over the past week. That’s the worst decline since the global markets plunged in August 2011 amid the U.S. debt default.

Not only that, but yields on Portuguese bonds surged amid fears the government would have to fund yet another bailout. And that contagion selling spilled over into other PIIGS countries, with yields on Spanish, Italian and Greek bonds climbing, too.

Now let’s get to the heart of the matter: If you don’t own Portuguese bonds, or shares of PIIGS companies that trade here in the U.S., like Portugal Telecom(Weiss Ratings: PT, C), which just plunged roughly 30 percent in a week, should you be worried?

I think it all depends on whether this turns out to be a brief brush fire, or something worse. The market action over the next several days will point the way.

“I think the euro is likely headed to the low 1.30s — or even the high 1.20s — and that means there’s still a ton of profit potential to be had.”

Look, as I said at the outset, none of Europe’s underlying fundamental problems have been solved. The ECB just papered over them. The problem is that all that papering over in Europe (and here, for that matter) drove bond prices all over the world to ridiculously stupid highs … and yields to ridiculously insane lows.

Stories like this in the Financial Times tell you why. Unable to get decent yields on low-risk bonds thanks to the glut of cheap central bank money, investors have been buying every lousy piece of paper Wall Street can churn out!

They aren’t rationally analyzing and drawing a distinction between one category of lousy bond (Portuguese bank paper) or another (CCC-rated corporate debt). They’re just buying anything and everything that yields even a percentage point or two more than low-risk bonds.

That means “correlation risk” is very, very high. Or in plain English, if investors start dumping Portuguese bonds out of fear over default, that could quickly lead to selling of other lousy bonds. That, in turn, would spread contagion throughout the credit markets in Europe and here. So I will be keeping a very close eye on my wide range of credit market indicators to see what messages they’re sending out in the days ahead.

Meanwhile, we’re already seeing gold rally on the news. It exploded by as much as $20 an ounce to $1,341 early on before pulling back a bit. That’s the highest level since mid-March, and it looks like a nice “clean” breakout on the charts could be brewing …

So first, if you haven’t already added some gold or gold mining exposure, my question is: What the heck are you waiting for?

Second, I sure hope you took my earlier advice to get out of the euro … or better yet, position yourself to profit from its decline! I think the euro is likely headed to the low 1.30s — or even the high 1.20s — and that means there’s still a ton of profit potential to be had.

My Safe Money Report model portfolio has precise “buy” and “sell” signals for investments that capitalize on both trends. And I’m pleased to report that my named investments are starting to move nicely in our favor. You can get my signals and more details here, or by calling us at 800-291-8545.

I’m also interested in your take on the latest euro-turmoil. Is this the start of something bigger, like in 2011-12? Is it just a flash in the pan? Have you been making money off the resulting moves in the gold and currency markets? If so, how?

Your fellow investors would greatly benefit from any information you can share. So please share your thoughts in the comment section.

OUR READERS SPEAK

The health-care debate continued at the website yesterday, and I will definitely keep my eye on the latest developments there so I can keep you updated. In the meantime, several other comments on various topics have been coming in so I want to address them.

First, Reader Dorian S. said the following on all these multi-billion dollar bank penalties: “I am appalled that the U.S. ‘Justice’ system is penalizing the shareholders of these companies rather than jailing the crooks who just about collapsed the world economy and made themselves richer.”

Good point. When banks have to pay out major fines, all their shareholders are technically helping pay for them. The executives and board members who steered their banks onto their rocks, though, have largely escaped scot-free!

Second, Reader Linda W. weighed in on the tax dodging that’s going on throughout Corporate America. Her comments: “If a company wants to relocate overseas, then just perhaps they do not want to benefit from selling their goods in the USA. However, perhaps we can have a national sales tax to capture tax revenue from these fly by night corporations, if they actually DO want to sell their goods in the USA.”

Again, interesting point. The complexity of the tax code and the tax domicile issue is keeping scores of lawyers and accountants busy, while stiffing the U.S. of tax revenue. So maybe a more simple solution like Linda’s would mitigate the problem.

Lastly, on inflation, Reader Richard D. provided some insights based on his own industry background: “I’d be betting that the restaurant sector will be taking a hard, but temporary hit due to rising food costs and healthcare costs.

“Foodservice is a very labor intensive industry, so the healthcare costs will affect them more than other industries. Restaurants find it hard to pass on rising food costs to their customers. After the temporary hit, restaurant prices will adjust and profits will rise as the price increases will raise the income base.

He added: “I was in the business for 40 years. Glad to be retired.”

Good one, Richard, and thanks for the comments! I’ve personally seen a lot of diversity in returns throughout the restaurant sector.

A name like Chipotle Mexican Grill(Weiss Ratings: CMG, B) has performed very well in the last year, with the shares trading very close to an all-time high. One of my personal favorite restaurants, Buffalo Wild Wings(Weiss Ratings: BWLD, A-), is also doing great. It has more than doubled since the beginning of 2013.

The crisis in Israel and Gaza continues to worsen, with Israel calling up 20,000 reservists to prepare for a potential ground invasion. On the other side, Hamas continues to fire rockets deeper into Israeli territory.

Another cause for worry in the Middle East? The militant group ISIS has reportedly seized nuclear material in Iraq. It’s “low grade” stuff, not the kind you can make a bomb out of. But there is still reportedly some risk.

We’re seeing further deterioration in U.S.-German relations over the latest spying allegations. Germany just announced that it’s expelling our CIA station chief there, one of the most public rebukes from a close ally in recent memory. It also speaks to the negative side effects of the massive expansion of our espionage efforts in recent years, which I discussed on Monday.

U.S. jobless claims sank 11,000 to 304,000 in the most recent week, a better result than expected. But European production figures stunk up the joint, as did data on Japanese machinery orders. Another reason to sell the euro and buy the dollar?

Reminder: You can let me know what you think by putting your comments here.

Until next time,

Mike Larson

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

{15 comments }

BernardThursday, July 10, 2014 at 5:42 pm

For years now, Weiss publications have touted the demise of the Euro. If anybody followed the advice of shorting the currency, they would have sustained important losses. Maybe you should study the fundamentals, such as money flows, and you might come to a different opinion. Just look at a 2 year chart to see how far off your recommendations were.

HeidiThursday, July 10, 2014 at 5:58 pm

The fellow investor’s were asked here today – July 10th 2014 – if any of them made any money off the resulting moves in gold ? If so, how ?
I assume – since nobody is here – they are still all counting their bills .

HowardThursday, July 10, 2014 at 6:28 pm

Just one example. Newcrest Mining Aust. (NCM). One of the worlds top 5 producers. At 2 million ounces per year has 75 years worth of reserves. This stock like others has been beaten down by 85% recently. The train is leaving the station.

billThursday, July 10, 2014 at 6:28 pm

I have been in 3 junior gold mine3month’sI am up about 60% to Larrys money and markets

HeidiThursday, July 10, 2014 at 7:25 pm

60 % up in 3 month ? Larry only recommended JNUG ( up 100 % sold at $ 28 !!! ) and IAG up from $ 3.50 about 13 % …that’s about 113 % …you missed some .

ChristopherThursday, July 10, 2014 at 7:00 pm

I think that you are trying to boost the $ for some reason that we don’t know yet but perhaps you do!

elizabeth wesleyThursday, July 10, 2014 at 9:15 pm

When the middle class is wiped out who will be left for the elite to rob?

Rob JonesFriday, July 11, 2014 at 7:46 am

elizabeth, looks like you and I are what is left!!

Robert CalabroThursday, July 10, 2014 at 9:41 pm

Dear Mike: I have invested in an ETF that is shorting the Euro. I am also shorting the with UDN. Our monetary base has increased 300% since 2008. Inflation is here. The government has been under reporting inflation for years. Inflation is approximately 7%. I would urge everyone to go to http://www.shadowstats.com for more information.

Rob W.Thursday, July 10, 2014 at 10:13 pm

We have used economic clout against the soviets. Is it possible that they started the pig slide against us? Greed makes an easy target. Perhaps spying on greedy big shots hit to close to home in Germany.

FredThursday, July 10, 2014 at 11:35 pm

PIIGS slide is deflationary. Banks are VERY weak and many will collapse soon. Europe started the trouble in the late 20s. They are starting it again.

Rob JonesFriday, July 11, 2014 at 7:39 am

your on the right track buying dollars, the euro finally falling. All that money in europe that needs a home much should end up in the usa. Since europe very unstable at this time watch dxy go up.

Donald LinkFriday, July 11, 2014 at 12:23 pm

Unfortunately the Europeans are still adicted to Keyenesian nonsense and they deserve what they get. Also, unfortunate, this is a world economy now and we will also be dragged down with them.

nohomehereSaturday, July 12, 2014 at 7:19 pm

I was just wondering if the contagion that is a result of european monetary unions, structural defects, will cause a flight to quality that could result in a quickening pace of the rise in the dollar strength and there-by raising US EXTERNAL DEBT RATES causing a slowdown to are already struggling recovery? would yellen have to show some guidence afterall ? Is the BIS right about the fed alternatives ?.also, Do the richer european economies that support the euro and inturn the poor piigs intend to follow the IMF’s french director Christine Legards guidence and give a hair cut to everyone and bail in sooner than later to stave off the inevitable?.Would that not dilute the euro and cause inflation and hold off deflation awhile? I would say we have a ways to go on this ride! Maybe , if the Gas doesn’t get shut off . European simbiotic relation with Putin. WOW, Whats next?